NEW YORK (Reuters) – Bankers running Subway’s sale have given private equity firms competing for the sandwich chain a $5 billion acquisition financing plan, hoping to weather a tough environment for leveraged buyouts and fetch the company’s asking price. More than $10 billion, people familiar with the matter said.
Interest rates have risen and concerns about an economic slowdown have increased since Subway said in February it was exploring a sale, making debt more expensive and less available to bargain-seeking buyers. This weighs in on how much private equity firms are offering to buy companies.
One of the sources said that offers to buy Subway have so far ranged between $8.5 billion and $10 billion. Subway’s financial advisor, JPMorgan Chase & Co (JPM.N), now hopes a $5 billion debt financing package offered by the acquirers will show it can borrow enough to build an attractive deal even at a valuation of more than $10 billion, the sources said.
The sources added that debt financing relies on a mix of loans and bonds, and its volume is equivalent to 6.75 times Subway’s 12-month earnings before interest, taxes, depreciation, and amortization, at about $750 million.
This funding can only be a temporary solution. The reason for this, the sources said, is that the cheapest option for Subway’s private equity buyer is likely to be to fund the acquisition over the long term through a so-called Whole Business Securitization (WBS). This may include borrowing using restaurant franchises as collateral.
WBS financing requires shop-by-store due diligence by rating agencies which can take over a year. Sources said bidders would have to rely on JPMorgan’s debt package or arrange their own financing to strike a deal with Subway, then refinance through the WBS scheme in the future.
Sources said Barclays plc, a major player in the WBS financing market, is one of the banks in discussions about long-term financing.
Subway, based in Milford, Connecticut, has revamped its operations to deal with outdated decor and $5 deals on foot-long sandwiches that have eroded franchisees’ profits. In 2021, the chain launched a menu overhaul and slick marketing campaign as it embarked on a turnaround plan that helped grow sales.
Sources said the JPMorgan financing package also offers a preferred stock component option with an interest rate of approximately 15%. Three sources added that this is a more expensive route that private equity firms may not choose.
Subway certainly allows bidders to use any financing avenue they want, as long as they can prove they can secure committed funding.
Subway’s second-round bids came last week from more than 10 private equity firms, one of the sources said, adding that Subway has pushed back low bids and shrinks the pool of final bidders. Bain Capital, TPG Inc. (TPG.O), Advent International Corp., TDR Capital, the acquisition arm of Goldman Sachs Group (GS.N) and Roark Capital are among the private equity firms participating in the auction, according to the sources.
The sources added that Underground will soon allow bidders to join a team before submitting final bids, and Bain, TPG and Advent are already in discussions about doing so.
The sources asked not to be identified because the details of the sale are confidential. Payne, TPG, and Advent declined to comment. TDR and Roark did not immediately respond to requests for comment. Subway, JPMorgan, Goldman Sachs and Barclays declined to comment.
Founded in 1965 by 17-year-old Fred DeLuca and family friend Peter Buck, the company has been owned by the founding families since opening their first restaurant called “Pete’s Super Submarines” in Bridgeport, Connecticut.
The chain, which has nearly 37,000 locations globally, is moving away from its traditional reliance on franchisees with only one or two locations, and instead is consolidating locations with fewer and more well-capitalized franchisees.
Subway reported earlier this month that global comparable sales were 12.1% higher in the first quarter and that guest visits rose, driven in part by restaurant renovations. It has been facing increased competition from competitors such as Jimmy John’s and Firehouse Subs (QSR.TO), Jersey Mike’s Subs, and Potbelly Corp (PBPB.O).
TPG and Bain were part of a group that owned Burger King when John Chidsey, now CEO of Subway, headed this fast food chain. For its part, Advent has invested in restaurants that include Bojangles and coffee shop operator First Watch. TDR operates the ASDA grocery store and gas station conglomerate EG Group.
(Reporting by Abigail Somerville and Anirban Sen in New York) Editing by Greg Romeliotis and Matthew Lewis
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